Patents and Innovation Economics

In the United States, we tend to study the Constitution to secure and understand our freedoms. This is a bit strange as our freedom throughout history has been secured mainly by property rights. This was understood by the founders and many others.

There is a “diversity in the faculties of men, from which the rights of property originate…. The protection of these faculties is the first object of government.”[1]

James Madison’s Federalist 10

“The reason why men enter into society is the preservation of their property.” John Locke

“Property rights … are the most basic of human rights and an essential foundation for other human rights.”[2]

Milton Friedman

Property rights in the United States were a matter of state law for most of its history, with the minor exception of the Fifth Amendment. Thus to gain a better understanding of how our freedom is secured, we need to study property rights. This is a big subject and this post will focus on the historical development and the philosophical foundations of property rights.

The concept of property rights started with some sense of ownership of food and personal possessions among nomadic people. People had the idea of a superior moral claim to the apple they picked or the deer they killed or the clothes they made and wore compared to other people. With the advent of the Agricultural Revolution people began to think they had a superior moral claim to the land they cultivated and the crops grown on this land, which was the beginning of the idea of property rights in land. However, these were not real property rights, because the King or other political body almost always reserved the power to trample peoples’ property rights when it was politically expedient. In the Middle Ages “property rights” were thought to reside ultimately in the King or the sovereign. Legal realists still hold onto this idea. During the Renaissance legal theorist worked on a rational basis for property rights, starting with Hugo Grotius in the early 1600s. Adam Mossoff has written an excellent paper explaining the historical development of property rights theory including the major theories today, called What is Property? Putting the Pieces Back Together.[3]

After Grotiuss, John Locke continued the work of developing a rational theory of property rights. Locke’s formulation is that anything in a state of nature (unowned) that someone makes useful, results in them having a property right in the item they made useful. So if you shoot a deer you have property rights in the deer or if you plant olive trees on some ownerless land you have a property right in the land and the trees. This is true according to Locke because you have an exclusive moral claim over yourself (body and mind) and anything you create value in gives you property rights in the item. This is commonly summarized as having property rights in one’s self.

It is important to understand that all of law is based on property rights logically (and historically). Some libertarians have tried to postulate systems where property rights are some sort of contract. You cannot have a contract unless you have an exchange and you cannot exchange something you do not own. You also need to have property rights over yourself to enter a contract. Contract law presupposes property rights law and to reverse the process results in nonsense. Tort law makes no sense without property rights. If you do not own yourself or some property how can you claim to have been harmed. This is true of all other areas of law also.

Property rights law was developed in common law countries and in the United States along Locke’s theoretical formulation for at least a century or more. For instance, in the United States the Homestead Act (of 1862) provided that any adult who had not taken up arms against the U.S. could acquire 160 acres of land by farming and living on the land for five years. The Act made the implicit assumption that the land was in a “state of nature” and that people could obtain property rights by making it more valuable. This is almost an exact formulation of Locke’s theory of property rights, except that the land had to be surveyed first and the acquirer had to put in an application.

There are several interesting things about the Homestead Acts. One is that they were first proposed before the U.S. Constitution was ratified and many other homestead acts were passed after the one in 1862. The Homestead Act of 1862 was clearly passed as part of the politics of the Civil War in the U.S. Another interesting point is the Homestead Act implies that land grants by Kings did not result in valid property rights. For instance, the land grants to George Washington for his military service from the British Crown did not confer valid property rights in the land. Washington had problems with squatters on this land, who seemed to understand that Washington’s property rights in this land were invalid since he did nothing to create value in the land.[4]

Another interesting thing about the Homestead Act is that the surveyed plats were separated by roads. There were no taxes to create or maintain these roads, so they were un-owned land or land in which no one could have property rights in. It is important to note that property rights in land that cannot be accessed make those rights meaningless. An essential element of all property rights in land includes access to and from the land and the rest of the world. This does not mean that the owner of the land cannot exclude people from their land, but it does mean that property rights in land cannot interfere with reasonable travel. This is one of those questions in law where the philosophy lays out the general theory, but the law has to work out some practical realities in which there is no exact answer. In the Homestead Act, they decided that roads had to exist around every square mile block of privately owned land (one mile grid). This obviously would have to be modified sometimes for terrain and another distance or pattern for the roads could have been selected without violating the general principles.

It would also be an abridgement of people’s right to travel if property rights in land could imprison people. People exercised the right to travel over land before there were any property rights in land. Thus property rights in land that unduly impinge on the ability of travel violate other people’s rights.

It appears the Romans understood this. In the twelve ancient Roman tablets that set out the law, tablet seven appears to require land owners to maintain the roads. “1. Let them keep the road in order. If they have not paved it, a man may drive his team where he likes.”[5] Table eight requires “Where a road runs in a straight line, it shall be eight feet, and where it curves, it shall be sixteen feet in width.”[6] Tablet nine requires “When a man’s land lies adjacent to the highway, he can enclose it in any way that he chooses; but if he neglects to do so, any other person can drive an animal over the land wherever he pleases.”[7] The Roman tablet eight also require space between buildings, “A space of two feet and a half must be left between neighboring buildings.”[8] This last law could have been for travel or to keep fires from spreading through the city. Unfortunately, there does not appear any commentary to let us know.

Some people have suggested that this ownerless land for roads in the Homesteading Act is inconsistent with Ayn Rand’s Objectivism: “Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.”[9] This mistake is based on a misunderstanding. There is no such thing as property. There are property rights and things in which people may have property rights. In informal language we often use the shorthand property to refer to something in which we or other people have property rights. Unfortunately, this shorthand results in confusion. Correctly interpreted what Rand’s statement is saying is that governments cannot have property rights in land or anything else only people can. What the government has is a custodial duty. The government cannot have a moral claim to have made something useful, only individuals can do this. Rand explained it this way with respect to the Homestead Act of 1862:

Thus, the government, in this case, was acting not as an owner but as the custodian of ownerless resources who defines objectively impartial rules by which potential owners may acquire them.[10]

Rand did not directly address the concept of property rights, however she laid out many of her ideas in two articles in Capitalism: The Unknown Ideal: 1) The Property Status of Airwaves, and 2) Patents and Copyrights. Rand echoes Locke when she explains the origin of property rights, “Any material element or resource which, in order to become of use or value to men, requires the application of human knowledge and effort, should be private property—by the right of those who apply the knowledge and effort.”[11] Rand is stating that because you made/created something valuable you have a moral claim to the item that is greater than other peoples’. Rand’s main refinement over Locke is to make it clear that this includes mental effort (in a way Locke leaves more ambiguous), “thus the law establishes the property right of a mind to that which it has brought into existence.”[12]

One important point that should be clear from this discussion is that dead people cannot have property rights. Property rights are a moral and legal relationship between a person and an item (tangible or intangible). A related point is that when someone abandons their property rights by no longer making something useful, then it is ownerless again and therefore in a state of nature. This means that someone else can come in and make the item productive again and therefore acquire property rights in the item. This is a very complicated subject and covering it in even a cursory way could be a whole book, however I will point to some examples. In common law there is something called adverse possession, which “is a situation when a person who does not have legal title to land (or real property) occupies the land without the permission of the legal owner” and gains legal title to the land.[13] Another complicated situation where these principles come into play is when a person dies or estates law. A dead person cannot have property rights in anything, so suddenly those items they had property rights in are ownerless. Property rights in land do not go on forever as many people assume. A detailed- discussion of this issue is beyond the scope of this article.

We have talked about how property rights arise, but not what they are. Many people think that their property rights in their land are unlimited that they go up infinitely into the sky and down to the center of the Earth and they can do anything they want on their land. Why do they think this? Did they create value 500 feet below the surface of their land? Did they create value 500 feet into the air above their land? Of course not. The property rights you obtain are related to the value you created. The most common form of property rights is called “fee simple” in the law. Fee simple allows you (ignoring building codes) to farm/ranch and have a house (building), run a business, etc. on your land. It does not allow you to put a commercial hog sty on your farm next to your neighbor’s house. This would violate nuisance laws, which ensure that you have reasonable enjoyment and use of your land. On the other hand, you cannot buy a farm and then build a house next to your neighbor’s pig sty and then sue them for nuisance.

In addition, there are other groups of property rights such as mining rights, which come in two varieties, lode and placer. Lode mineral rights are designed to ensure that the person who discovers a vein of say gold is the owner of the whole vein. Otherwise it would be easy for other people to say they discovered the obvious other end of the vein and profit at the expense of the true discoverer of the vein. These rights may not include any rights to the surface land above them, while a place type of mineral rights does. There are also grazing rights, water rights, easements, trademark rights, property rights in chattel, copyrights, patent rights (inventions), trade secrets, etc. All of these property rights are different and come with different rights of action and rules, based on the value that was created.

As Locke first explained, property is fundamentally justified and defined by the nature of the value created and secured to its owner … To wit, different types of property rights are defined and secured differently under the law.

Some property rights come with the right to exclude, however grazing rights do not include a right to exclude unless the person is interfering unreasonably with the grazing rights owner’s ability to graze the land. Even with “fee simple” ownership of land your right to exclude is limited to using reasonable means to exclude people who are interfering with you enjoyment and use of your land. This means you cannot shoot someone for crossing your land.

Property rights are a vast and complex area of law of which this article just touches on. Property rights are the most important area to securing our freedoms and all law starts with and builds on property rights. The key philosophical foundations of property rights are:

Property rights is the foundation of all law

Property rights are a moral and legal claim to take action with respect to an object

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Opponents of patents often like to refer to them as a monopoly, which is a thoroughly discredited idea (see here, here, here, here, and here). Another argument they often raise is that “real” property rights do not expire, they go on in perpetuity. Since patents and trademarks expire after a certain period of time, they cannot be true property rights.

To answer this question, it is necessary that examine the nature of property rights more carefully. You obtain property rights in something because you made it productive or created it. Of course you can also trade your rights in something you created for currency and then contract to buy something else, thus obtaining property rights in the item. Your rights in say land are limited by the activity you undertook to obtain those rights. For instance, if you farmed the land and say put a house on it, then you have a right to continue those activities and ones reasonably related to them. However, this does not mean that your property rights extend to the center of the earth or up infinitely into space. It also does not mean you can put a huge pigsty on the edge your land next to your neighbor’s house. Note this was/is true under common law, no need for regulatory law or home owners’ associations.

Property rights are part of the system of natural rights, which are based on the foundation of self-ownership or self-sovereignty.

Is man a sovereign individual who owns his person, his mind, his life and its products – or is he the property of the tribe …[1]

Capitalism: The Unknown Ideal, What is Capitalism, p 10.

Locke also based natural rights on self-ownership or self-sovereignty. These ideas are not axioms but derived from observation and logic.[2] You obtain property rights in something because you created it or made it productive. Since you own yourself, you own those things you create, however the limits of your property rights are determined by what you created (made productive) and some practical legal implications.

When it comes to land, most people obtain property rights in the land because they farmed it or made it useful for habitation or both. These property rights do not go on forever as commonly conceived. Dead people cannot own something, only living people can have property rights. When a person dies their property rights expire including their property rights in land. The heirs do not acquire the property rights in the land (assuming they were not an active part of making the land productive), they just receive the first right to acquire the property rights in the land, by making it productive. If they are unable to make the land productive or they are otherwise not a productive people they will quickly have to sell the land to someone who can make it productive.

You might argue that the law does not precisely follow the philosophical basis of the law and that would be correct. However, the law has to consider factors that the pure philosopher does not, for instance, efficiency, evidentiary issues, and certainty of title. If the ownership of land and other property were not passed to the heirs in the form of first right to acquire, then every time someone died there would be a free for all to acquire the land, etc. This would lead to fights, both legal and physical. This would defeat the legal goals of efficiency, evidentiary clarity, and title clarity. However that is not to suggest that the system we have “inherited” for the disposition of estates is perfect or the best.

In the case of patents/copyrights the most philosophically correct position for the length of a patent/copyright (from this point forward I will just discuss patents) would be the inventor’s life. However, this would cause all sorts of practical patents. The patent for a first inventor could issue and one day later the inventor could die, while another inventor could live for another seventy years. This would be unjust. More importantly it would make it very difficult to verify if a patent was still active. Last it would make it very risky to invest in company built around an invention that was patented. Imagine that you are asked to invest in company whose main asset is an invention that could be worth hundreds of millions of dollars, however if the inventor dies tomorrow the company would lose its most important asset. These practical realities of the law mean that patents should have a certain set period of time. The patent cannot go on in perpetuity because the inventor’s heirs cannot make the asset productive as in the case of land, so they cannot reacquire the patent rights. The US has tried out a number of different term lengths for patents. Presently, it is 20 years from the date of filing and that makes it essentially uniform with the rest of the world. My suggestion would be to make the term of a patent closer to half a person’s life, since most people do not invent things as a child and there is absolutely no macroeconomic evidence that stronger patents have ever inhibited the economy.

[1] Rand in other places states that Rights are based on the right to life. She necessarily had to mean the right your own life, to be consistent with inalienable rights. It is clear that she was not opposed to the idea of self-ownership and did not see this inconsistent with the idea of natural rights. It is also easier to understand natural rights from a self-ownership point of view than a right to (your own) life.

[2] It is beyond the scope of this paper to explain the derivation of natural rights by Locke and Rand.

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I have often pointed out that patents are a natural right under Locke’s theory of property rights. Locke stated, in modern language, that you own yourself so you have the right to those things you create. Many detractors have suggested that this absurd. According to Locke the three chief natural rights are life, liberty, and property. Locke states that protecting property rights is the main reason for forming governments.

Sec. 124. The great and chief end, therefore, of men’s uniting into commonwealths, and putting themselves under government, is the preservation of their property.[1]

Inventions are the result the inventor’s labor and therefore property under Locke. Property is a natural right, so patents are natural rights. Despite this logical connection, many people have continued to deny that patents (property rights in inventions) are a natural right.

Locke’s ideas were incorporated in the law of the United States by William Blackstone’s Commentaries on the Laws of England. This treatise became the basis of common law in the US. Here is what Blackstone said about patents and copyrights (intellectual property). Note that he cites Locke’s ideas on property rights for his explanation for why intellectual property is Property.

There is still another species of property, which (if it subsists by the common law) being grounded on labour and inventionis more properly reducible to the head of occupancy than any other; since the right of occupancy itself is supposed by Mr. Locke, and many others, to be founded on the personal labour of the occupant. And this is the right, which an author may be supposed to have in his own original literary compositions; so that no other person without his leave may publish or make profit of the copies. When a man by the exertion of his rational powers has produced an original work, he seems to have clearly a right to dispose of that identical work as he pleases, and any attempt to vary the disposition he has made of it, appears to be an invasion of that right.

Now the identity of a literary composition consists entirely in the sentiment and the language: the same conceptions, clothed in the same words, must necessarily be the same composition: and whatever method be taken of exhibiting that composition to the ear or the eye of another, by recital, by writing, or by printing, in any number of copies, or at any period of time, it is always the identical work of the author which is so exhibited; and no other man (it hath been thought) can have a right to exhibit it, especially for profit, without the author’s consent.

This consent may perhaps be tacitly given to all mankind, when, an author suffers his work to be published by another hand, without any claim or reserve of right, and without stamping on it any marks of ownership; it being then a present to the public, like building a church or bridge, or laying out a new highway: but, in case the author sells a single book, or totally grants the copyright, it hath been supposed, in the one case, that the buyer hath no more right to multiply copies of that book for sale, than he hath to imitate for the like purpose the ticket which is bought for admission to an opera or a concert, and that, in the other, the whole property, with all it’s exclusive rights, is perpetually transferred to the grantee.

On the other hand it is urged, that though the exclusive property of the manuscript, and all which it contains, undoubtedly belongs to the author, before it is printed or published; yet from the instant of publication, the exclusive right of an author or his assigns to the sole communication of his ideas immediately vanishes and evaporates; as being a right of too subtile and unsubstantial a nature to become the subject of property at the common law, and only capable of being guarded by positive statutes and special provisions of the magistrate.

The Roman law adjudged, that if one man wrote any thing on the paper or parchment of another, the writing should belong to the owner of the blank materials meaning thereby the mechanical operation of writing, for which it directed the scribe to receive a satisfaction; for in works of genius and invention, as in painting on another man’s canvas, the same law gave the canvas to the painter. As to any other property in the works of the understanding, the law is silent; though the sale of literary copies, for the purposes of recital or multiplication, is certainly as antient as the times of Terence, Martial, and Statius. Neither with us in England hath there been (till very lately) any final determination upon the right of authors at the common law.

But whatever inherent copyright might have been supposed to subsist by the common law, the statute 8 Ann. c. 19 hath now declared that the author and his assigns shall have the sole liberty of printing and reprinting his works for the term of fourteen years, and no longer; and hath also protected that property by additional penalties and forfeitures: directing farther, that if, at the end of that term, the author himself be living, the right shall then return to him for another term of the same duration: and a similar privilege is extended to the inventors of prints and engravings, for the term of eight and twenty years, by the statute 8 Geo. II. c. 13, and 7 Geo. III. c. 38, besides an action for damages, with double costs, by statute 17 Geo. III. c. 57. All which parliamentary protections appear to have been suggested by the exception in the statute of monopolies, 21 Jac., I. c. 3,which allows a royal patent of privilege to be granted for fourteen years to any inventor of a new manufacture, for the sole working or making of the same; by virtue whereof it is held, that a temporary property therein becomes vested in the king’s patentee. (emphasis added)

The idea that patents are a natural right is incorporated in early American law as the quote below shows.

“we protect intellectual property, the labors of the mind, productions and interests as much a man’s own, and as much the fruit of his honest industry, as the wheat he cultivates, or the flocks he rears.” (Davoll v. Brown, 7 F. Cas. 197, 199 [C.C.D. Mass. 1845].)

It is just obstinance or disingenuousness to suggest that patents are not part of natural rights.

[1] The Second Treatise of Civil Government; 1690; John Locke; CHAP. IX., Of the Ends of Political Society and Government.